DIALING DOLLARS

The prepaid-phone-card industry has overcome many hurdles in the past five years to gain significant distribution within mass-market retail channels. However, while some supermarket chains and mass-market retailers are cashing in, many others have yet to reap the benefits of this burgeoning industry.Figures compiled by Boston-based consulting firm Atlantic-ACM, which tracks sales of prepaid phone

The prepaid-phone-card industry has overcome many hurdles in the past five years to gain significant distribution within mass-market retail channels. However, while some supermarket chains and mass-market retailers are cashing in, many others have yet to reap the benefits of this burgeoning industry.

Figures compiled by Boston-based consulting firm Atlantic-ACM, which tracks sales of prepaid phone cards, reveal that from 1992 to 1995 sales surpassed the $1 billion mark and are expected to reach $4.3 billion by the year 2000. Yet despite this growth, industry analyst and consultant Steve Capka, president of International Telecard, Portland, Ore., said that many supermarkets and other mass retailers still aren't aware of the tremendous profitability that can be derived from phone-card sales and are not vigorously marketing the cards.

"My experience has shown that a large number of retailers are unaware that prepaid phone cards offer substantial profits, as they can get a 35% to 40% margin on each sale. But profits will increase only if retailers do a better selling job and devote more time and energy toward working with suppliers to inform consumers about how good a value prepaid phone cards really are," he said.

What's needed, according to Capka, is for supermarkets to spur sales by building a marketing plan around two key elements -- visibility and value.

"Retailers have to make phone cards visible within the store through placement of point-of-purchase materials that explain the cards' value. Once consumers are convinced of the tremendous savings provided by prepaid cards on long-distance domestic and international calls, sales will take off," Capka said.

In analyzing all three channels, suppliers polled by SN generally agree that the greatest potential to expand the phone-card market even further lies in the supermarket channel because of the large volume of repeat customers it serves.

Although some supermarkets and drug chains have excelled in marketing phone cards, there is still much work to be done by many supermarkets and other retailers that have yet to implement effective marketing plans. On the positive side, technological developments, such as point-of-sale activation, have helped improve merchandising by enabling retailers to display cards openly throughout the store without the risk of theft.

"Supermarkets are the single best distribution channel for our prepaid cards, as they are doing the best job of all the channels in executing promotions at store level and incorporating our promotions into their weekly advertising," said Marlene Waltz, director of prepaid cards at Sprint. "By taking advantage of their many checkout lines, supermarkets can persuade a lot of potential customers to buy cards by displaying them near the registers on J-hooks, clip-strips or pegs."

Chicago-based Ameritech also has a big stake in the supermarket channel, its cards currently being sold in Fleming, Piggly Wiggly and Aldi stores, among others. "We're focusing a lot of energy on supermarkets, as we see sales growing month over month between 10% and 15%," said Michelle Healy, Ameritech's senior marketing manager. The company has invested in POP materials. Each new retailer receives a startup kit with display materials, including lane dividers for the checkout area, danglers to be hung over each register, clip-strips used near the cashier and two-sided window clings.

Trip Huey, vice president of sales and marketing for Quest Telecom in Atlanta, agrees the most effective marketing of phone cards occurs at the POS. "Our experience with retailers in all three channels reveals that stores that suspend cards on J-hooks or in caddy packs can increase sales up to fivefold," he said. Quest promotes its card to retailers by emphasizing that the cards "meet consumer needs while offering businesses high profit margins, endless promotional possibilities and long-term residual profits."

Noting that there are successes and failures in every channel, Huey said that Quest's marketing strategy is not as much "channel-specific as store-specific." In other words, while a particular chain of supermarkets may be doing significant sales volume, some stores within that chain are exceeding the chain's average sales while many others are lagging far behind. "In a typical scenario, it's likely that 25% of a chain's stores are bringing in 80% of total phone-card sales," Huey said.

One of Quest's major marketing successes has been with Coborn's, St. Cloud, Minn., which is marketing the phone card as part of Quest's loyalty program known as "Calling Rewards."

This program is similar to airline frequent-flier programs. It rewards shoppers with free long-distance phone time when selected items are purchased. The program also allows customers to purchase any amount of prepaid long-distance time at the POS.

Other suppliers are joining with retailers in implementing successful marketing strategies. According to Melody Abella, marketing manger for prepaid phonecards at Atcall, Vienna, Va., the company's customized and private-label phone-card programs have been popular with retailers in both the supermarket and drug channels. About 60 of Rochester, N.Y.-based Wegmans Food Markets' upscale stores are now being supplied by Atcall. The cards feature a customized logo. Also in New York, the Duane Reade drug chain is selling an Atcall-designed private-label card with the retailer's logo and color scheme.

In addition to incorporating the company's name, logo and choice of graphics, the cards can also serve as a marketing tool, as they can be programmed with customized greetings and messages to tie in to the retailer's in-store promotions. These programs also are accompanied by Atcall's variety of POP options aimed at maximizing profits.

Atcall also has produced prepaid phone cards to promote the new Gillette Mach 3 razor, which became available at retail outlets in July. Users of this 15-minute phone card hear a greeting from Gillette about the new razor.

Another unique marketing strategy is being used by Ameritech, which announced July 27 it was teaming up with the Illinois Lottery to offer consumers a free Lotto "quick-pick" ticket with the purchase of a phone card. The agreement is the first in the nation to use on-line lottery terminals as part of a phone-card promotion. The system works like this: phone cards are available in $10 and $20 denominations; customers who purchase a $10 card receive a free $1 quick-pick ticket, and those buying a $20 phone card receive a free $2 ticket. Under the partnership, Ameritech purchases all the Lotto tickets and passes them on to consumers at no charge.

With Lotto terminals available at 6,500 retailers throughout the state, ranging from small convenience stores to supermarket chains and major mass retailers, this partnership enables Ameritech to reach thousands of Illinois residents who may never have used a phone card.

"Leveraging the lottery's reach makes Ameritech better equipped to address the growing demand for prepaid phone cards. Potentially, these cards will be available to more Illinois residents than ever before," said Doug Whitley, president of Ameritech Illinois.

Retail distribution has been expanded by the intense competition among suppliers to increase market share.

"One of the main obstacles we face in getting our cards into supermarkets is the chain's contractual obligation to another card provider," said Quest Telecom's Huey. "A particular supplier and supermarket enter into exclusive commitments concerning marketing distribution alliances that last from one to three years. These exclusive alliances effectively shut out all other suppliers from selling cards in this supermarket chain during that period."

Looking ahead, analyst Capka sees a time when these alliances may be altered to allow stores to offer several different cards to the consumer. "With so many phone cards on the market, I see the biggest obstacle right now for suppliers is remaining competitive with a quality, reliable product."

While many supermarkets and mass retailers have yet to derive substantial profits from phone-card sales, suppliers remain bullish on the future.

Demonstrating its intent to expand within the supermarket channel, Sprint recently announced that its Spree prepaid Foncard is now available for sale at nearly 1,100 Food Lion supermarkets in nine Southeastern states, plus another 94 Kash n' Karry Food Stores in the Tampa, Fla., area. Kash n' Karry is a division of the Salisbury, N.C.-based Food Lion chain. The same announcement also confirmed a major move into the mass-merchant channel, as Spree cards are now being sold at 2,100 Kmart stores.

To encourage supermarkets and other mass retailers nationwide to assist in marketing its Spree Foncard, Sprint presented its first retailer of the year award in 1997 to 195-store Hy-Vee, West Des Moines, Iowa. Winning out over finalists including Lucky Stores, QuikTrip, The Pantry, BP Oil and Allsup's, Hy-Vee was recognized for its performance in store promotions, merchandising, suggestive selling, employee incentive programs, co-op programs and customer service.